James Dyson hits out at the existing “lacklustre” UK R&D tax credit system and its “botched” implementation by HM Revenue & Customs.

Dyson is right in his assertion that the recent tightening of policy in restricting certain claims (e.g. for prototypes that are eventually sold) is fundamentally flawed, however, my experience of working with the specialist R&D HMRC units has been positive overall.

Sure, the legislation is complex in parts but this is inherent in a system that seeks to adapt for ever-changing claims in line with the emergence of new industries. It should be added that much of the complexity has arisen from attempts to enhance the attractiveness and availability of the research and development tax credits for UK companies!

Dyson suggests that a new improved R&D tax credit scheme be implemented that is simpler to apply and that should be targeted at small, high tech companies. Although I sympathise with the principle of helping many of our future innovative small businesses, such a policy is misguided in its laser focus as it omits larger, more diverse companies that can equally contribute to the UK economy from successful R&D.

An increase of the R&D tax credit rate to 200% (from a current rate of 175% for SMEs) could further increase the attractiveness of the UK as a place for internationally mobile companies to do business – the UK currently ranks 19th internationally for the attractiveness of its R&D incentive regime.

To shift from recent murmurs of a Conservative government (if elected) abolishing the R&D tax credit scheme (in order to simplify the UK company corporation tax regime) to actually improving the regime if the recommendations from this report (commissioned by the Tories) are implemented is welcome news.

Enterprise Investment Scheme (EIS)

Meeting the funding gap for start-up and fast growth hi-tech technology companies has always been tricky given the higher risk of failure – the recent credit crunch has made this a whole lot worse. Angel investors (or micropreneurs) have frequently come to the rescue as, not only can they bring their expertise to the table (particularly if they made their money in a similar sector), but they can also invest in smaller tranches to meet this funding gap where the companies are too small for larger private equity or venture capital funding – and where the banks prefer to look the other way.

Despite the existence of UK angel funding, Dyson notes that over £3.5bn would have been invested if the UK kept parity with angel investment in the US – actual investment in the UK was a disappointing £1bn in 2007.

Tax incentives are available to encourage private investment in UK fledging companies including EIS which provides 20% income tax relief subject to qualifying holding requirements and company types. Dyson calls for an increase in the income tax relief to 30% which should be welcomed, although how far this would go in encouraging wealthy individuals to part with their cash to invest in start-up tech companies remains debatable – unless they have a deep understanding of the sectors.

Overall, James Dyson calls for a change of perception towards science and technology from grassroot levels with greater focus on such subjects at school. He cites a frightening statistic that: